German move blazes trail for the Big Four

Has
KPMG
set a train in motion with its German merger? That’s the question being asked by
many at the top of the Big Four this week.

KPMG senior partner John Griffith-Jones stunned the market when he announced
the move a fortnight ago today. The merger sees
KPMG’s
UK firm share profits with its German counterpart.

Will other firms follow suit? And will KPMG extend the scope of KPMG Europe
to other member firms?

The move may have come as a surprise, but it also appears to have an
inexorable momentum to it.

Almost the first questions asked when KPMG announced the move were: why, and
why now?

The impact of the European Commission’s eighth directive on audit was
pinpointed by senior KPMG officials as a major reason for the move.

Griffith-Jones said: ‘We are responding quickly to the directive’s
fundamental aims of better regulation of the audit and accountancy profession.
KPMG Europe LLP will have a strong European business voice to champion improved
audit quality, liability reform and the highest standards of professionalism in
the public interest.’

KPMG had sought to integrate a few years back but was unable to find an
appropriate legal structure. Now there is one.

But there are still some serious questions to be answered as to whether or
not the merger will generate many advantages.

The firm is not talking about any synergies through the merger, certainly.
‘There will be no job cuts,’ one senior figure said.

‘As clients become more global, they expect particular efficiencies, and
increasingly more complex and specialist skills,’ said Richard Bennison, head of
audit at KPMG UK.

Bennison added that it was important to be able to act with ‘one voice’
across Europe.

‘It would make for higher-quality audit work, and make the process more e
fficient. We’ve always had a challenge in keeping more people. Now there will
also be more opportunity for staff to move and have different challenges,’
Bennison said.

Although managing a trans-national partnership could be a tricky matter, law
firms have always pulled it off effectively.

‘There are no truly pan-European accountancy firms,’ said Richard Turner,
head of the partnerships group at legal firm Allen & Overy.

‘Law firms will tend to post an entrepreneurial partner overseas, and build
from the ground up.’

So there’s a different historical approach. There may always be tensions in
such structures: would a UK-based lawyer working for a US firm be promoted to
partner so easily if the US firm was more profitable, for instance? But most of
those issues can presumably be worked around if the profit-sharing structure is
largely discretionary and not too rigid.

KPMG is hoping that other European firms will come along for the ride. The
French market, for example, is also quite large, with KPMG making almost 700m
euros (£471m) a year.

The director of the board of KPMG France told business paper Les Echos:
‘Everyone thinks it’s a good idea, but no-one has evaluated the risks.’

A spokesman for KPMG UK said: ‘This is the first stage. After the discussions
around the German and UK firms, further talks have been held with other KPMG
member firms in Europe. It will be up to them to join.’

So what are other firms doing?

A spokeswoman for PricewaterhouseCoopers told Accountancy Age: ‘PwC
is committed to its strategy of leading through quality, promoting seamless
client service and effective management of risk.’

Deloitte has been more open about the issue. Chief executive John Connolly
told Accountancy Age that the firm thinks about such moves from time to
time. It does not have any plans at the moment, although it has bought the Swiss
member firm.

Connolly insisted last week that he was comfortable with the cohesion of
Deloitte’s global network in providing a service, and suggested that strong
networks did not need closer integration.

How much of that was a sly dig at KPMG, it is difficult to tell.

Ernst & Young likewise shows no obvious interest in European integration.
Its German CEO Herbert Mueller told German financial paper Handelsblatt: ‘We
have had cross-border contractual co-operations for quite a long time now.’

But he added: ‘We will closely observe what KPMG does.’

Below the surface, though, there is far more going on. PwC people seemed
discreetly a bit miffed about the move. On one level, there is a strong whiff of
sour grapes at the UK’s largest firm, which is cheesed off at KPMG boasting
about being the largest firm in Europe – ‘double counting’ as some have put it.

On another level, there is speculation – unconfirmed by people inside the
firm – that PwC was planning to do something similar and has been beaten to the
punch.

Although partners at KPMG’s rivals were quick to suggest that the move could
be a bad idea, there could be an unstoppable logic to it. There is, after all,
some cachet in a practice being able to claim ‘largest firm status.’

Likewise, the closer contact between KPMG UK and KPMG Germany may make other
firms jealous in time.

KPMG said that the move would involve ‘integrated European graduate and other
training schemes, and aim to create a culture in which our people will be
offered new international opportunities, a compelling future, and a wide variety
of cross-border challenges and experiences’.

The attractions to employees of working for a global firm (something that law
firms have always stressed when marketing themselves to graduates) could be
compelling.

Deloitte’s global chief executive William Parrett has suggested that globally
integrated firms are the future. It would seem odd if KPMG’s rivals don’t
ultimately accept that its European step is a pathfinding move to that end.